Clark v. U.S., Civ.A.1:98CV1425JOF.

• Decision Date: 21 September 1999
• Docket Number: No. Civ.A.1:98CV1425JOF.,Civ.A.1:98CV1425JOF.
• Citation: 68 F.Supp.2d 1333
• Parties: John E. CLARK and Catherine P. Clark, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Georgia

68 F.Supp.2d 1333

John E. CLARK and Catherine P. Clark, Plaintiffs, v. UNITED STATES of America, Defendant.

No. Civ.A.1:98CV1425JOF.

United States District Court, N.D. Georgia, Atlanta Division.

September 21, 1999.

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James Alan Gober, Arnall, Golden & Gregory, Atlanta, GA, Stuart A. Smith, New York City, for plaintiffs.

James Randolph Schulz, Assistant United States Attorney, Atlanta, GA, Michael N. Wilcove, U.S. Department of Justice Tax Division, Washington, D.C., for defendants.

ORDER

FORRESTER, District Judge.

This matter is before the court on Defendant's partial motion to dismiss or, in the alternative, partial motion for summary judgment [8-1, 8-2] and both Defendant's and Plaintiffs' motions to supplement [13-1, 15-1].

I. Statement of the Case

Plaintiffs John E. Clark and Catherine P. Clark brought the instant action against the United States for recovery of federal income tax and interest which they assert was illegally assessed and collected for calendar years 1979, 1980, 1982, 1983, 1984, and 1985.

A. Background

Plaintiffs allege the following facts in support of their complaint. In 1982, Plaintiff John E. Clark purchased an interest in a limited partnership known as Masters Recycling Associates ("Masters") which was subject to the partnership audit procedures enacted through the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub.L. 97-248, 96 Stat. 324 (1982), codified as sections 6221 through 6233 of the Internal Revenue Code ("Code"), 26 U.S.C. §§ 6221-6233. Plaintiff purchased the limited partnership interest in Masters upon the recommendation of his investment counsel, an attorney, upon whom he relied for legal, financial, and tax advice. Plaintiff's counsel explained that Masters involved plastic recycling equipment that would be eligible for both an "investment tax credit" and a "business energy credit." Plaintiff also understood from his counsel's representations that Masters would pay royalties to the limited partners that would be earned from the sale of recycled pellets. Plaintiff was told that his investment counsel had recommended the investment in Masters to his other clients.

Plaintiff discussed the investment in Masters with a tax attorney. After reviewing the matter along with the comprehensive opinion of tax counsel, the tax attorney concluded that Plaintiff would be eligible for the tax benefits promised by Plaintiff's original investment counsel. In reliance on this investment advice, Plaintiff John E. Clark purchased a partial unit in Masters for $25,000.

On their 1982 joint tax return, Plaintiffs claimed a deduction for advance rentals in the amount of $19,615, an investment tax credit of $15,517, and a business energy credit of $15,517. They thereby reduced their tax liability in the amount of $39,669. Plaintiffs carried back the excess credits to their 1979 and 1980 returns and forward to their 1983, 1984 and 1985 returns.

At times relevant to these events, Sam Winer was the promoter and tax matters partner ("TMP") of various recycling partnerships, including Masters. On August 17, 1984, at the request of the District Counsel of the IRS in Jacksonville, Florida, the United States filed a complaint, pursuant to 26 U.S.C. § 7408, against Winer and Winer Development Corporation in the United States District Court for the Middle District of Florida. The Government alleged that Winer had organized and promoted various abusive shelters, including Masters, and had made gross valuation overstatements in connection with Masters. The Government asked for an injunction preventing Winer from representing Masters on behalf of its partners and from engaging in the marketing of recycling partnerships. Winer consented to the entry of the requested injunction, and on February 18, 1986 the Florida district court entered a final order enjoining Winer from taking any action to organize, promote, or sell tax shelters or from representing that any limited partner was entitled to federal income tax deductions or credits regarding Masters' property. The court also required Winer to resign as TMP for Masters and to waive his right to intervene in any court proceeding as TMP for Masters. Winer thereafter resigned as TMP of Masters and sent each partner a notice letter setting forth the terms of the injunction and announcing his resignation.

The Government's demands regarding Winer's resignation were made by Alice Davis of the Tax Division of the United States Department of Justice. The notice letter sent by Winer to the limited partners of Masters was drafted in substantial part by Davis. Davis also selected E.B.A. Investment Co. ("E.B.A."), one of the limited partners of Masters, to serve as TMP for Masters. The letter sent by Winer to the partners of Masters explained that E.B.A. would serve as the substitute TMP for Masters. However, neither Winer nor any other partner of Masters was consulted by Davis with respect to the replacement of the TMP or the appointment of E.B.A. Further, despite the appointment of E.B.A. as TMP, E.B.A. never accepted the office, performed any functions as TMP or dealt with any partner or with the Government on behalf of the partnership.

The IRS eventually attempted to reinstate Winer as TMP for Masters to facilitate its processing of tax claims against the partners and the partnership under the TEFRA audit rules. On August 11, 1986, the Government and Winer filed a "joint motion for specific relief from final judgment of permanent injunction" with the district court requesting that Winer be permitted to act as TMP for "some recycling services" for the purpose of "providing administrative services." Plaintiffs contend that Winer agreed to the reappointment under the belief that he was compelled to do so, without knowledge of his duties as TMP, and under the duress of the Government.

On September 17, 1986, the Florida district court granted the motion and ordered that Winer act as TMP for the purpose of providing administrative services. Plaintiffs allege that the text of the Order signed by the Florida district court was drafted by Davis, and that the Order was agreed to by the court in an ex parte proceeding of which neither E.B.A. nor any other limited partners of Masters were informed. Neither Winer, the Government, nor the IRS informed the limited partners of Masters or E.B.A., the substitute TMP, of the existence or outcome of the proceeding. Plaintiffs contend that through these acts the Government assumed practical control over Masters to the detriment of its limited partners.

Plaintiffs contend that because the Order endorsed by the Florida district court reinstated Winer solely for the purpose of providing administrative services, it did not authorize Winer to sign any IRS consent forms, specifically Forms 872-P, which extend the statute of limitations within which the IRS may issue a final partnership administrative adjustment ("FPAA") to a partnership. Plaintiffs claim that despite his limitations, Winer signed such forms on behalf of Masters upon request by the IRS.

The IRS sent a final partnership administrative adjustment solely to Winer on behalf of all partners of Masters which effected a drastic readjustment of Masters' income and deductions. Plaintiffs contend that this act of the IRS was in error, because once Winer resigned as TMP of Masters on February 18, 1986, he no longer had any authority to sign Forms 872-P on behalf of Masters, to represent Masters in its dealings with the IRS, or to represent Masters in any court proceeding involving Masters' taxable income and deductions. Plaintiffs argue that the IRS's issuance of an final partnership administrative adjustment to Winer for the purpose of determining adjustments in income deductions for Masters for years 1982, 1983, 1984 and 1985 was barred by the statute of limitations because Winer was without authority to sign forms extending the limitations period.

On July 21, 1989, Winer petitioned the United States Tax Court purportedly on behalf of Masters as TMP of Masters and thereby represented that he was authorized to seek a redetermination of the adjustment made against Masters in the final partnership administrative adjustment issued by the IRS for tax years 1982, 1983, 1984 and 1985. Plaintiffs contend that Winer's representation was in direct violation of the Florida district court order in which Winer waived his right to intervene in any court proceeding as TMP on behalf of Masters. In response to Winer's petition, the IRS District Council in Boston, Massachusetts filed an answer in the Tax Court. Plaintiffs allege that the IRS attorneys knew of the injunction issued by the Florida district court and knew that Winer was actually acting as an agent of the Government and not in the interests of Masters and its partners. Plaintiffs claim that despite this knowledge, the IRS attorneys failed to inform the Tax Court of these facts and instead pursued the case as if Masters was properly represented.

The IRS thereafter filed in Tax Court a motion for entry of decision pursuant to the Tax Court Rules of Practice and Procedure Rule 248(b) representing that Winer had entered into a settlement agreement with the IRS. Plaintiffs complain that the motion did not disclose the restraints on Winer's authority as TMP, the existence of E.B.A. as substitute TMP, the Florida district court's Order restricting Winer's representative powers, or the lack of fiduciary relationship between Winer and the Masters partners. Plaintiffs allege that the IRS attorneys knew that Winer was not a proper representative of Masters because the Government had requested the limitations on Winer's authority and had conferred frequently with the attorneys who appeared in the case before the district court in Florida but did nothing to disclose these facts to the Tax Court.

On February 23, 1994, the Tax Court issued a decision resolving all the...